Paying for the things and services we constantly use has become essential. Taking into account everything that is going on globally, there is only one method of exchanging services, and that method is money, or more accurately, the exchange of currency. But how exactly does it work, and why is it important?
Why Foreign Currency Exchange Is Important?
When we talk about foreign currency exchange, the first thing that comes to people’s mind is travel, and second, trade. Apart from these two commonly perceived modes of use, currency exchange can encompass other different contexts and scenarios.
Let’s take a prime example to better understand the whole picture. So why is currency exchange important? We all know the big players, like the US Dollar and the Euro, but the currency game gets much more interesting as we travel the globe.
Suppose you’re from India. You can’t just fly to America, order a cheeseburger and insist on paying with rupees. That’s where currency exchange comes in.
How Currency Exchange Works?
The value of a currency is determined based on supply and demand. When the demand for a particular country’s currency, let’s say, US dollars, increases, its value also increases. Here’s how it plays out:
- High Demand for USD: If many people want to buy US Dollars, it becomes more scarce. This pushes the price of USD up compared to other currencies.
- Low Demand for USD: Conversely, if fewer people want to buy US Dollars, it becomes more plentiful. This drives the price of USD down compared to other currencies.
This can be driven by a number of factors, such as:
- Economic strength of a country
- By how much the interest rates are set
- Rise or fall in the inflation rate
- How stable the political environment in the country is
- Any trade surpluses or deficits the country has
Understanding The Process
Currency exchange facilitates the flow of money and goods between countries. The exchange of one particular currency for the other is done at an agreed upon exchange rate. The exchange rate is the rate at which one currency may be converted into another.
The foreign exchange market, also known as the FX or currency market, is one of the most dynamic and fastest-growing financial markets in the world. Let’s break down the concept of currency exchange with a relatable example.
You want to visit America, but all you have in your bank account is your local currency. You need to convert it to Japanese Yen, or your trip will be a no-go. Here’s what you can do.
1. Exchange Currency
You go to a local bank or a reputable financial service provider and ask to exchange your currency for the amount of Yen you’ll require on your trip to Japan. This process is generally the best way to exchange currency without paying huge fees.
The bank will provide an exchange rate for the transaction so you know exactly how many Yen you’re getting for the sum of your local currency. If you feel it’s acceptable, go ahead and pay for it.
2. Exchange Currency At The Airport
Suppose it’s too late, and you decide exchanging currency at the airport is the best option. You can go for that, too. It’s convenient, but the exchange rate might not be the most favourable.
3. Licensed Money Changers
These are often independent shops operating in your destination country that specialise in money exchange. They can offer competitive rates, especially in areas with high tourist traffic.
4. Hotels
Many hotels provide currency exchange services for guests, although their rates might not be the most attractive. It’s a convenient option if you need a small amount of local currency upon arrival.
The Best Time To Exchange Currency
Unfortunately, there’s no magic formula for the “best” time to exchange currency. Exchange rates constantly fluctuate based on the complex interplay of these factors. However, here are some things to consider:
- Track Exchange Rates: Track the fluctuations in exchange rates between the currency of your home country and the host country prior to the journey. This will give you an idea of where its daily fluctuations lie.
- News And Events: Get the latest information on economic events that may affect the foreign exchange market. For instance, an expected increase in a country’s interest rates may lead to an appreciation of its currency.
- Set Alerts: Most banks, as well as most money exchange companies, offer features to create notifications for specific exchange rates. This way, you’ll be alerted when the rate is in your desired range, in this case, the target zone.
- Don’t Exchange Large Amounts At Airports: Airport exchange booths often offer less favourable rates due to convenience fees.
- Consider A Mix of Exchange Methods: Carry a small amount of local currency of your destination country for initial arrival needs, then rely on forex cards or debit cards for the rest of the trip as they are more secure and less prone to theft when you explore unchartered territories.
- Be Flexible: If the current exchange rate is not favourable, you can wait for a more opportune time to change a larger amount.
Conclusion
By understanding supply and demand and staying informed, you can increase your chances of getting a decent rate and avoid feeling like you got the short end of the stick. Currency exchange is a dynamic system. When you properly grasp its core principles, you can be a more informed traveller and make smarter decisions when exchanging your hard-earned cash.
If you ever need expert help to make your next currency exchange a breeze, visit Unipay Forex for competitive rates and expert advice.
